$1.35 Trillion Tax Cut Starts A Trickle Of Cash Back To You

WASHINGTON — Beaming with pride over a major political achievement, President Bush on Thursday signed a $1.35 trillion, 10-year tax cut that he called "the first broad tax relief in a generation."

The new act is also one of the most complicated and controversial tax bills ever approved by Congress, full of phase-ins and other provisions that critics say will diminish its economic impact and perhaps limit the size of the actual relief for many taxpayers.

In signing his prize bill in a celebratory East Room ceremony, Bush set the government on a new course, using much of a projected government surplus for tax relief instead of higher government spending or paying down the national debt. Soon about $39 billion in rebate checks of up to $600 will be on their way to 91.6 million taxpayers.

"President Bush, together with Congress, overcame defeatist deadlock and delivered to the nation tax relief that is fair, family friendly, fiscally sound, and a second wind for our economy," Treasury Secretary Paul O'Neill said. "It will have a real, positive effect on millions of Americans in all walks of life."

But conservative and liberal experts find fault with the measure, which would dribble out its benefits over 10 years in the form of rate reductions, expanded tax credits for children and adoptions, estate tax repeal, education incentives and relief for married taxpayers.

"It's not going to give a boost to the economy," said Bruce Bartlett, a conservative economist for the National Center for Policy Analysis. "Its main impact is political."

The rebate checks will be for up to $300 for individuals and $600 for couples, but, based on their incomes last year, about 39 million people who had no tax liability in 2000 will not receive a rebate, and another 17 million will receive less than the maximum amount.

FOR THE RECORD - CORRECTION PUBLISHED SATURDAY, JUNE 9, 2001A headline on Page 11A of Friday's editions dealing with the average rebate from the tax plan was incorrect. It should have said that rebates of up to $600 soon will be on the way.We regret the error.

Reductions in the tax rates are the heart of the bill, and they are phased in faster than many other provisions. By 2006, the top tax rate will fall from 39.6 percent to 35 percent, the 36 percent rate will drop to 33 percent, and the 28 percent rate to 25 percent. The 15 percent rate remains intact, though a new 10 percent bracket would be carved out at the lowest income levels, for singles earning up to $6,000 and couples up to $12,000.

Yet the measure makes so many changes in the tax system in stages over the next 10 years that analysts said it may encourage taxpayers to try to "game" the system by trying to shift income from one year to the next.

Tax experts also said unless the bill is revisited, 35.5 million people will find themselves subject to the so-called alternative minimum tax by the end of the decade. This would come as a major shock to many upper middle-income people because this levy was originally approved in 1969 to prevent the wealthy from avoiding taxation.

This tax, known as the AMT, essentially requires those falling under its purview to make a second tax calculation without counting such deductions as state and local income taxes or personal exemptions. They would have to pay the higher of the two calculations. The more people it covers, the more it would undercut the broad tax-rate reductions in the bill, said the experts.

The bill makes a modest fix in this tax by raising an exemption to keep moderate-income people from paying it. But this exemption will expire in 2005, the Joint Committee on Taxation calculates.

"I think this is kind of a tax-cut time bomb," said Bartlett, a Treasury and White House official in the administration of Bush's father. "No matter what happens in the 2004 elections, there probably has to be another tax cut in 2005."

"It's going to be a political hot potato," said James Seidel, who edits a federal tax publication for RIA, a New York-based provider of tax information and software to accountants and professionals. It will particularly hit those in high-tax states like New York and those with large families who claim their children as exemptions, he said.

Congress decided against providing post-2005 relief from the alternative minimum tax because such a measure would have increased the cost of the tax bill by another $300 billion.

"Marriage penalty" relief, which would be achieved by increasing the standard deduction for couples and by including more of their income in the 15 percent bracket, would not kick in until 2005 and wouldn't be fully effective until 2009--a long delay for an idea passionately pushed by its Republican backers in Congress. Several experts said the estate tax provisions are so complicated that many will have a hard time figuring out their long-term tax strategy.